Alan Cowgill

Every now and then, I have students ask me if my home study

system is compatible with SEC regulations…

Yes, it is compatible.

I realized, for the benefit of my students, I needed to

address these folks concerns.

While speaking all over the nation, meeting thousands of real

estate investors the past couple of years and getting ask

these same SEC questions, I realized that there is a lot of

confusion concerning SEC regulations vs private lending.

The confusion seems to arise because of the following:

1) Each state establishes their own regulations and

exemptions. Therefore there are different guidelines

depending on where you live.

2) If you cross state lines with your private lending,

i.e. houses in one state and lenders in another, the

Federal SEC regulations come into play.

3) There are a lot of half truths floating around and when

people hear these, they get confused and possibly fearful.

To be better equipped to answer everyone’s questions, I

decided to hire and attorney to do some research. Since

each state is able to establish their own regulations, I

decided to have the attorney start his research with

the state of Ohio.

Some highlights while working with my attorney:

1) In Ohio I can acquire up to 9 private lenders without

having to file any paperwork with the state. Once I file

the proper paperwork my number of lenders is unlimited.

Different States have different numbers and most are higher

than Ohio.

2) As long as my properties and lenders are in Ohio. Just

the state regulations apply. If I have lenders and or

houses in different states then the federal SEC regulations

apply.

3) If I go over 9 lenders, the paperwork I need to file with

the state is very very simple.

4) I need to give a disclosure statement to potential lenders.

5) Can’t pool lender money but I can if I file the proper

paperwork.

6) Can’t use the word ‘guarantee’ in my advertising.

As a side note, some of you are under the impression, that the

SEC is out to cause you problems. The SEC is not the bad guy,

they are looking for the bad guys. They want legitimate

business owners to prosper. They are very willing to help you

if you just ask. They just want you to comply with their

regulations.

The following is some information from my attorney Ralph M.

Sherman on SEC compliance.

Topic: What is a security?

The term ’security’ is broadly defined to mean ‘any certificate or instrument,

or any oral, written, or electronic agreement, understanding, or opportunity,

that represents title to or interest in, or is secured by any lien or charge upon

the capital, assets, profits, property or credit of any person or of any public or

governmental body, subdivision or agency.’

That’s the language used on the website of the Ohio Division of Securities.

This definition includes such common items as shares of stock, warrants and

options, promissory notes, membership interests in limited liability

companies, bonds and debentures. Limited partnership interests are

considered to be securities, while general partnership interests are generally

not considered to be securities. The statutory definition additionally includes

the term ‘investment contract,’ which has been construed by court decisions

to include numerous investment opportunities and business opportunities,

which at first glance may not appear to fit within the definition of ’security.’

Topic: Does that mean private lending may be considered securities?

When you are borrowing money from private lenders, you are offering them

a security. You’re making an IOU to them, by borrowing their money and

promising to pay them a fixed interest rate over a certain time period or when

the sale of a property is concluded.

When a company sells shares or stock, it’s giving the purchaser of the

securities an ownership interest. Shareholders make their money when they

get dividends on their investment or when they sell their stock. Private

lenders are lending you funds and they make their money by receiving

the interest rate you’ve promised them.

Ohio and most other states allow securities to be offered to investors when

they are either registered or offered under a proper exemption from

registration. Securities laws do define debt as a type of security. This means

that your business has the same kind of opportunities as businesses that sell

shares of their company to the public. It also means that securities laws and

regulations apply to the business.

Topic: Who regulates securities?

Each state regulates investments offered to its citizens. The federal

government, through the Securities & Exchange Commission (SEC),

regulates offerings across state lines. This means that you’ll have to look at

the laws and regulations in your state when you’re only working with private

lenders in your state. If you’re working with folks across state lines, you’ll

need to comply with the laws in each state you’re working in and comply

with the SEC’s rules too.

Topic: What about advertising?

It’s important to understand that each state sets its rules for advertising

investment opportunities, which includes private lending. Every state has

opportunities for you to advertise to bring in private lenders.

In the course materials that Alan has asked me to prepare for you, you’ll see

this referred to as from 1-9 private lenders or the 3(H) exemption. In states

where you can’t advertise to this small number of private lenders, you should

step up to the equivalent of a 6(A)2 (in Ohio that’s 10-34 private lenders) or a

6(A)1 (35 and more private lenders). By doing this, most states will allow

you to advertise to private lenders and grow your business.

Topic: What about advertising across state lines?

As you’ll see in the course materials, this kind of approach is referred to as a

Reg. D offering, and we suggest you use the approach under Rule 504 of

Reg. D. If you’re looking at using this approach to reach out to private

lenders outside of your home state, it is possible to advertise to private

lenders.

You would use a state exemption that allows you to advertise and only

advertise to accredited investors. Accredited investors are defined elsewhere

in this package of information. As a reminder, the Securities Act of 1933 has

several definitions of accredited investors. The most important for your

business are likely to be these two:

1. a natural person who has individual net worth, or joint net worth with

the person’s spouse, that exceeds $1 million at the time of the purchase;

2. a natural person with income exceeding $200,000 in each of the

two most recent years or joint income with a spouse exceeding $300,000

for those years and a reasonable expectation of the same income level in

the current year.

Topic: What sort of disclosure should I give my private lenders?

When you are reaching out to private lenders, whether it’s just a handful or a

large group, it’s very important that you disclose the risks and benefits of the

private lending opportunity you’re offering them. There are several reasons

you should do this. Some are for the benefit of your private lenders, who will

want to know what your business is and how they can make money lending to

you.

Securities laws also work to protect private lenders, so you must disclose to

them what the potential downsides are. These might include how long it will

take to sell a property; mortgage rate changes, housing market pricing

fluctuations, or the cost of rehabbing a property. There are others you’ll

want to mention.

Disclosure documents will also help you protect yourself and business

against possible claims that you didn’t describe the business properly. A

strong disclosure document will help you protect your reputation and protect

you against frivolous litigation. It will also help you comply with securities

laws and regulations and, should you get a question from a regulator, help

you demonstrate to them you are working to be in compliance.

Topic: Commissions

The bottom line on paying commissions is: don’t. Unless you are using a

proper registration or exemption and using a licensed or registered

broker/dealer, almost every state prohibits paying commissions for the sale

of securities.

Now, in Ohio, it is possible to pay someone to help you get potential private

lenders to a luncheon, but only if you pay him or her whether or not these

folks end up lending you money. That means that you can’t pay them based

on their success rate or anything that connects their compensation to getting

private lenders. Other states won’t even let you do that unless the people

you’re compensating are registered or licensed broker/dealers.

Topic: Public Offerings

It’s easiest to explain what it means by explaining what a public

offering isn’t.

Generally, any offering that is not exempt under the private offering

exemption of the securities act of 1933 (Regulation D) is a public offering.

This means that if you aren’t using an exempt offering, as we talk about

extensively in the interview and in the course materials, then you are

getting involved in a public offering. Each and every state has its own

definition of exempt offerings and these aren’t considered to be public

offerings. We talk about some of these exempt offerings in Ohio and other

states in the interview and in the course materials you’ve received.

Exempt offerings are what open the door for you to run your real estate

investing business successfully and in compliance.

Topic: Doing Business

Remember, securities laws and regulations offer you many opportunities to

do your real estate investing business and stay in compliance. Yes, there’s

going to be some paperwork that goes with these laws and regulations. It’s

just part of doing business, and that’s what Alan’s course is all about,

helping you get into business and do it the right way and successfully.

Ralph M. Sherman, Esq., is an attorney who has been in practice for over sixteen years, working with small-business owners and entrepreneurs to raise funds and run their businesses in compliance with the laws, helping them to take advantage of the opportunities they find to build their businesses. Alan Cowgill has asked him to help his students understand how securities laws affect their business.

Special Notes from Alan:

1) The above is probably more information than most of you

ever wanted to know about SEC requirements but I have found

that the best way to eliminate the confusion is with

knowledge.

2) Most of you are going to have under 9 lenders (or under

what ever the number is in your state) so very little of the

above will apply to you:).

3) In concert with Ralph M. Sherman I have created an SEC

educational package including an hour long audio CD and

booklet packed with information and documents that will be

added to my home study system PLMEII. You can’t get it

separately. This new package is in editing and will be

available shortly.

Alan Cowgill is a speaker, author, and real estate entrepreneur. Alan has bought or sold over 200 investment properties. His step-by-step system “Private Lending Made Easy” teaches others to find private lenders. Contact Alan at 937-390-0816 or 866-831-3540. For a FREE audio go to www.PrivateLendingMadeEasy.com